The main types of commercial real estate
- Industrial: warehouses, distribution centers, manufacturing buildings, flex space and truck yards.
- Retail: shopping centers, storefronts and single-tenant buildings such as restaurants and pharmacies.
- Office: from small professional suites to large buildings.
- Multifamily: apartment buildings with five or more units are usually financed and valued as commercial property.
- Land and specialty: development sites, data centers, self storage, hotels and more.
How commercial leases differ from home rentals
Commercial leases run longer, often three to ten years, and the tenant usually pays more of the building costs. Most terms are negotiable, including rent increases, free rent, improvements and who repairs what. Consumer protections that apply to home rentals mostly do not apply, so reading the lease carefully matters.
How commercial property is valued
Investors value commercial property mainly on the income it produces. The key numbers:
- Net operating income (NOI): rent and other income, less vacancy and operating expenses.
- Cap rate: NOI divided by price. A building with $55,000 of NOI bought for $1,000,000 has a 5.5% cap rate.
- DSCR: NOI divided by the yearly loan payments. Lenders use it to size the loan.
When loan rates are close to or above cap rates, borrowing can lower an investor's return instead of raising it. Check any deal in a minute with our cap rate and DSCR calculator.
How a commercial purchase works
- Letter of intent: a short, usually non-binding outline of price and key terms.
- Purchase agreement: the binding contract, with time set aside for due diligence.
- Due diligence: leases, financials, title, environmental reports, zoning and the building's condition.
- Financing: bank, SBA, DSCR or private loans, each with its own timeline.
- Closing: often 60 to 120 days after the accepted offer, depending on financing and diligence.
Who is involved in a deal
- Agents: represent the tenant, buyer, landlord or seller and run the search, pricing and negotiation.
- Lenders: banks, SBA lenders and private lenders who size and approve the loan.
- Attorneys: review the lease or purchase agreement and explain the risk.
- Escrow and title: hold the money, check ownership and record the sale.
- Appraisers and inspectors: confirm value and check the roof, systems and environmental history.
Common mistakes to avoid
- Comparing spaces or buildings on asking price instead of total cost.
- Skipping a zoning check for the exact use you plan.
- Waiting for financing until after the offer is accepted.
- Assuming a cap rate is good without comparing it with the loan rate.
Financing options in brief
Business owners buying their own building often use an SBA 504 loan, which can allow about 10% down when the business occupies at least 51% of an existing building. Investors use bank loans, DSCR loans that qualify on the property's income, or bridge loans for properties that need work. Lenders make their own credit decisions, so get pre-qualified before you make an offer.
Lease or buy?
For a business, owning builds equity and fixes your occupancy cost, while leasing keeps cash free for the business. The lease or own calculator compares both with your own numbers.